Tuesday, December 16, 2008

What the New Government Should Do

There is misplaced hue and cry in the media that the new government has not been able to do anything in the last five months and thus a conclusion is made by some commentators that it sets a trend and that nothing would possibly be done by the current dispensation. The threat is that the political government may came under such a pressure that it may start bringing in half baked policies and solutions and start tinkering with smooth running established policies. In this two part article, we would examine as to what can be possibly done by the new government in the economic arena in the short run, which is the theme of this piece. In another part, we would examine the political and administrative issues that could be taken up by the new administration for a longer term and more fundamental over-haul of the system.

This hue and cry is not new. Unfortunately the system tolerates long spells of military led governments and becomes intolerant with the short spelled civilian and democratic governments; either it is the high expectations in the wake of elections wherein promises are made or the problems and difficulties of people have reached an unbearable level or it is both. It is sincerely hoped that it is too early for the undemocratic and invisible forces to start their destabilising game.

Most pressing and urgent problem of food and energy inflation is largely imported. almost all the countries are suffering from these issues, except the oil rich nations. No Nobel prize holders headed governments could have done anything about it, at least in the short run. It is simplistic to blame either the previous government or the current ones for these woes.

The days of revolutions and revolutionary policies are over. Many developing countries have played the politics of revolution without success. The name of the game today is continuity, stability and endurance in government policies; flexibility, involvement of the stake holders, fast track implementation mechanisms are the additional required features. Revolutionary policies have not delivered in the past. Look at what Bhutto’s nationalization of industries and banks achieved. Musharraf government started with jailing prominent industrialists and sending sentries to shop keeper for tax and bill collection. He activated NAB and ended up with NRO.

There are always new problems and new solutions in changing perspectives of international politics, technology and trade. The new government does not have to search for problems ; these are well known, and are pressing ones. Even the solutions have long been debated and quite a few are in our national intellectual basket.

The main problems are law and order, food shortages and high prices, energy demand ,dwindling social sector, trade imbalance and shortage of revenue, poor housing and infrastructure.

I hope I would be proven wrong, that law and order situation may not improve in the foreseeable future. Poverty, underdevelopment , indefinite postponement of reforms in the tribal belt, the Afghan Jihad legacy, inexpedient expediencies of big powers in not solving the Middle East and Kashmir issues, convenient export of dissident and revolutionary manpower from Arab countries to this region are the determinants of the problem. If Americans are not persuaded by our national leaders that peaceful options be pursued and if they intensify direct attacks and incursion on Pakistan territory, the problem may become even more complex. Is there a larger game? We are not short of conspiracy theorists who argue that 9/11 was an American conspiracy and that Americans are in for larger strategic goals including oil and minerals.

There is a myth among many Pakistanis that Pakistan is a resource rich country. It may not be liked by our patriots and my compatriots but the reality is that it is not. Resource rich countries are Iran, Iraq, Saudi Arabia, Nigeria,and Indonesia besides Europe and the USA and some Latin American countries. We are short of water and short of land, coupled with burgeoning population. Half of the area falls in Balochistan which is mostly inaccessible for a variety of reasons;95 per cent of countries population is cramped in the remaining 50% land mass of the country. Most minerals are of low grade and concentration; look at Iron and copper. The Copper mine at Saindak has been a financial liability . One can bring forth many cases of resource poverty.

Military myths have been similarly inculcated among the masses. Military performance and capabilities have been well documented in the two wars; Kargil. The lack of success against militants are additional indicators. I would not further elaborate on this.

It is useful to creatively investigate and contest these myths, for it would help us in truly understanding the country’s problems and creating a political environment and consensus that may enable governments pursue realistic policies, goals and initiatives, domestically and abroad , in political and economic arena.

Much of the population is poor and illiterate ,estranged with its governments and elite and divided in tribes, sects, ethnicity and mythical folklore. Local government can not take action against traffic violations and land grabbers lest it may have ethnic fall out. Dams can not be built because there is a zero sum game and mistrust among provinces. Where is the nation which the super patriots want to push against India and now even America .This is the perspective that must be borne in mind while dealing or commenting on the problems of governance and development in Pakistan.

Let us now see as to what is possible and feasible in the economic field. Assuming that law and order does not improve ,one should not count much on direct foreign investment and export led growth. DFI may continue to flow in telecom and energy. Attention should therefore be paid on mobilising local investment for import substitution in industry, agriculture and other sectors.

Budgetary resource gap and its allocation need special attention. Budget deficit has traditionally hovered around 7_% of GNP. The deficit is met through internal and external borrowing which contributes to inflation and foreign dependence, the latter at tremendous consequences on national sovereignty. There is an upper limit on increasing the revenue, most of it being indirect. Excessive extraction of existing tax payers may be counter productive.

The only feasible option appears to be reducing the non productive expenditure which constitutes 40% of the budget. Military expenditure and administrative expenses are the two major items thereof. In the current internal security environment, a reduction in these items appears to be impractical. However, this has been a long term problem for Pakistan’s economy. The internal security situation has in major part developed because, for a long time disproportionate resources have been diverted to these items, away from vitally needed investments in social sector.

It is a vicious cycle, more military and police, more repression, more poverty and more estrangement and alienation which has now acquired the dimension of militancy and terrorism. Recruits from a poor, unhealthy and illiterate populace would contribute to deterioration in performance and productivity. However such reductions in expenditure are easier said than done.The problem is that some people, especially the right wing wants education ,health, prosperity along with a high agenda on Kashmir and fighting with India – all at the same time. It is not possible. One would have to prioritise; high political agenda or improvement in the lives of people.

Ironically the poor masses are also for strong political agenda .Consequently the masses, having less power for resource extraction, get a short stick in terms of allocation in social sector. It is quite apparent that business as usual can not go on a for a long time now .On the other hand , an arbitrary cut in the short term by the legislature is neither possible nor advisable. A systematic approach and dialogue ought to be initiated with the stake holders. Retired military leaders have often indicated that a 25% reduction is feasible without compromising defence effectiveness. A few percentage point reduction in real term per year may be able to achieve this target in 3-5 years. One would also feel the need of strategic and doctrinal adjustments and restructuring in the wake of nuclearisation and missiles development. Roman or Raj army styles are wasteful and anachronistic and do not match with the requirements of an age compounded with the complexities of a nuclear milieu and fertile terrorism. Without creativity and innovation, nuclear weapons will be adding additional burden on conventional defence, as it appears to be happening already. Many believed that it would happen otherwise.

On macro economic policy front, consensus policies on tariff and taxation ought to continue in its present shape. Some reforms should be considered in the banking sector. Banking sector seems to have outgrown disproportionately in the past years . Banks have earned profits of 40%. This surplus should not be permitted to continue; either government should siphon it off through taxation or some kind of interest rate control should be introduced. The banking spread (difference between average borrowing and lending rates) is much too high; 6-8% as compared to 2% in the US 3% in Europe. Prices in developing countries such as ours are not determined by pure competition, the latter being there only for labour. (In fact with labour, the dice is loaded the other way round –more supply less demand, and thus unduly low wages. There are natural and, informal cartels which operate; the invisible hand of monopolists and cartelists and not of market and pure competition. Partly high interest rates are due to excessive salaries of the banking executives, who seem to have conspired with the bank owners. Why should the banks be allowed to earn 40% return on equity. This must be cut down ,decreasing the interest rates. The non performing loans are due to their own lending policies of pushing consumer finance to unsustainable limits.

Reform is in order in the micro finance sector. A number of unscrupulous micro finance banks have started operating. They are the bankers of the poor, but lend at excessive rates, sometimes 22-25% p.a. It is difficult for a poor borrower to pay these rates. These banks are reportedly hiring goondas who harass and even kidnap and torture these poor borrowers, sometimes reportedly in the premises of these banks or in the hide outs of the collection agencies run by the goondas or retired police and military personnel. Government should introduce cheap and subsidised finance thru its own banks thus phasing out these so called micro finance banks or put some lid on their practices resulting in cheaper and controlled rates thru cheaper credit lines. Market is never fair in this country; food prices, cement and sugar cartels etc are the living example.

A lot can be done in agriculture. The country and sector is not short of ideas and solutions. There is even consensus on many ideas. But a lot depends on government in this respect, which normally fails to deliver, be it credit or extension, and others. A lot can be achieved if government can bring the house in order.

Having been associated with Harvard in the past for some time, I would like to disbelieve that Harvard economists advised GOP in 1960’s not to pay much attention to wheat and agriculture as it could be more efficiently produced in the US and imported from there. Fortunately the advice was not taken. However same traces of this simplistic advice remained in our successive policies which did not give the required attention and support to agriculture. It is said that a growth of 4% p.a. is required in agriculture, to feed the burgeoning population and enhance the currently prevailing low national nutrition levels. .

The growth in agriculture has been erratic and depended an vagaries of weather. Much agricultural output is attributed to increase in area under cultivation and other inputs, and not to increase in productivity. There is an upper hint to increase in area under cultivation and in other inputs. Agriculture growth should be steady at 4% and should come out of increase in productivity. Neither production nor productivity could increase. Why, the answer is long. But a few things could be done without waiting for miracles. Fortunately, there is consensus on fair price approach to growers. Output increases in food crops can only be sustained if fair prices are guaranteed to the farmer. There is an upper limit in this respect as well. Part of the agricultural profitability should come from rise in productivity which would result from the government intervention in agricultural credit, research and extension exercitation of the relevant institutions, bringing into play the market forces and reform in research and agri-universities and in agricultural extension.. There is a plethora of advice of past commission reports that should be seen, analysed and implemented. Achieving self sufficiency in cooking oil and food grains should be our main objective in agricultural policy. An agricultural task force should be formed to help achieve these objectives and realistic but tough targets be given to the relevant officials along with monitoring of performance and achievements.

Agriculture is suffering and would suffer more in future due to water scarcity. Water problem, apart from being intimately associated with agriculture, is an independent problem on its own. Our supply of fresh water resources is – per capita as compared to other parts of the world like Europe ,US and South America and even Southeast Asia. Water shortage would increase world wide, if not managed and controlled properly by national governments. Too much water is wasted by industry, agriculture, commerce and household. Water conservation and its efficient use would improve agriculture and living standards and hygiene. Sprinkling and dripping irrigation has a lot of potential, which government should promote than to continue to rely on flood irrigation. A lot of international research and advice is available to be implemented. There is an annual water conference, which has generated a lot of advice. This should be read, analysed and put into practice where feasible. Water recycling, waste water management, small and dispersed water storage, saline agriculture etc are the areas which need special attention. Plugging water wastage in urban areas would release a lot of useful water for the poor, hygiene and sanitation. Leakages and excessive flows at the household and municipal level are important culprits. A water conservation project or agency should be created, but not just a sign board.

In agriculture, initiatives are required in areas other than grains and crops. Milk, dairy and meat could further rural prosperity significantly. There is a proposal (not mine) pending for quite some time now; Allotting one acre rural land and loaning two buffaloes/ cows to the landless peasant families. This would provide both food and shelter and job to the landless unemployed peasants, enhancing milk and meat output. There can not be a better multi targeted intervention. End of patwari culture, a cherished good always of successive administration must be pursued. Institutional measures such as modernisation of land records and associated legal procedural changes would dilute Patwari power and machinations Only if our security establishment could be persuaded ,GIS system could revolutionise not only the land record system but the whole agricultural statistical and planning and forecasting system thru integration of GIS and satellite imagery. A way could be find out to mitigate the security concerns. Frankly all data management may have security implications. A thoroughly isolated village is the most secure but would one want it.

Drinking water in urban and rural areas need much attention. There is marked deterioration in urban areas, and there is no system at all in rural areas for safe drinking water supply. A project had been launched by the previous government which has faded away due to the usual corrupt practices. A continuous program and activity in this respect is in order.

If people’s lot is to be improved, investment and attention is required in social sector, namely education, health and hygiene. In this case again, the policy frame work is available in the form of MDGs (Millenium Development Goals), to which Pakistan and other developing countries are committed. Pakistan is already lagging behind the schedule in these. An affirmation and commitment to MDGs should be announced as a first step. Projects and programs should be developed for achieving MDGs .The sector is plagued by thorough corruption. It would appear simplistic to suggest that corruption be weeded out totally. However, one would expect that some success can be achieved towards curtailing excessive and flagrant cases. A task force, comprising of public representatives, independent professionals, and stake holder should be formed for monitoring the progress in every section of MDGs. All of this requires money and resource allocation, which has been discussed else where.

Musharaf regime diverted disproportionately large resources to higher education. The excessive funding has naturally resulted in all kinds of fancy and supercilious projects almost on bordering lunacy. Immediate corrective measures are required .Much starved primary and secondary education should receive the kind of attention and resources it deserves. Already Pakistan ranks too low in human development indices, in “good” company with Mali, Chad and Zaire, although not very far below than India. Poor’s empowerment or betterment can come only through education, at least at the primary level. In sindh, primary education is the worst victim; apart from resource issues corruption and poor management has taken its toll resulting in extremely poor quality, output and coverage, not to name the proverbial ghost schools and teachers.

Energy sector has been the biggest victim of Musharraf regime’s in action, delays and undue posturing. Kalabagh dam way pushed hard enough, but in vain, as political consensus could not he granted, It is said that the crisis was created to woo support for Kalabagh Dam. Ironically Musharraf invited Chinese assistance on Thar in his very early years. A Chinese firm invested considerable time and effort in studying and developing a viable proposal and offered to sell electricity from Thar Coal at 6.5 cents. The offer was not accepted. Thar and hydel power are the only hopes for supply of much needed electrical power; hydel in the north and coal in the South. Although there are technical problems with Thar Coal, these are not insurmountable. Associated issues of infrastructure development must be handled by the provincial and federal government. Thar coal development has also been a victim of parochial and sub nationalist themes along with those who are looking forward to reap undue gains; hence the too much tussle on control. The PPP government has done well to have made the Thar coal Authority. To safeguard the interest of Sindh, adequate royalty and mandatory social development of the area, which are already in vogue, would take care. If private sector and international companies are shy, it would be a good idea to develop infrastructure and launch a 200 MW public sector project under WAPDA with Chinese assistance. It is a preposterous idea to import coal and invest in a jetty costing 200 million dollars or so, knowing that government is not able to pay either in local or foreign currency the legitimate dues of WAPDA and IPPS and knowing that foreign currency resources are being exhausted. While negotiating energy contracts with IPPS, local or foreign, one should bear in mind that the energy prices would continue to increase, as the fossil fuels are being exhausted world wide. Pricing coal or other fossil commodity based on landed prices or international prices may be very dangerous. For a change, let us have same thing for comparative advantage. While any thing else is expensive, let there be cheap electricity from Thar Coal. A cost plus pricing formula may be more appropriate in this respect. Present government should aim at 2000 MW of coal power during their tenure to be reached by 2012. There are many hydel options both small and large other than Kalabagh. Private power should be encouraged in small Hydel sector.

Industrial land and housing land is an essential input both for individuals and as wells as industry and commerce. Urban land and real estate has become unaffordably expensive, resulting in housing shortage, congestion and higher cost of doing business having negative influence on exports, land and infrastructure development. A great housing scheme conceived by Nawaz Government was brought down due to political reasons and perhaps corruption as well. The idea of utilizing unused public land and passing it to the housing projects of the poor and lower middle class was a good one. A similar scheme with appropriate reform should be revived. As reported by Senator Taj Haider ,Shaheed Benazir had a dream of giving way one plot of land to every single poor family in the country, and to be leased in the name of the woman of the house, thereby achieving two cherished goods in one step. I am sure PPP government should be actively considering this. Apart from subsidised schemes, even a normal land development and supply should bring the land prices down.

Industrial land especially in Karachi is still more dearer. Industrialists owning land in industrial estates are preferring to indulge in real estate activities than installing industries there. Most industrial estates are fully allotted and over subscribed. Hub and Nooriabad have literally fled into oblivion for a variety of reasons.

SMEs, the so called and rightly called engines of growth can not buy such expensive land thereby industrial growth is discouraged. The current solidarity among the two major political parties should also show its effect in reviving the projects which were victims of earlier political brutality. Schemes like Surjani Town, and others in others parts of the country should be revived and developed. There are other novel and innovative proposals for SME’s such as high rise industrial estate that need to be looked into and implemented. There is no dearth of good ideas in this respect.

The central theme of these lines is that the policies, actual and proposed, are available in abundance. There is no need of “new wisdom”, to blink the eyes of the people, as is being lamented by commentators that no new wisdom has been shown by the new government. What is important is action and implementation. What one expects the new government is to take charge of the situation, provide leadership and initiative, assemble experts and stake holders and get to work. Buck up, Ministers. Don’t be so despondent and snug. Things can change. You can make a difference. Change and achievements are possible. Your work would be appreciated.

Outh band kamar kia darta hai

Phir deekh Khuda kia karta hai

Tighten your belt, what are you afraid of.

You will see what God does (in your assistance)

The writer is policy planning expert and author of many books on these issues.He was a research fellow at Harvard University and management cosultant. akhtarali1949@gmail.com